3. Consignment benefits and risks

It is important to analyze consignment arrangements to understand the rights and obligations of consignor and consignee as well as the benefits and risks both parties are exposed to. When preparing or analyzing a consignment agreement, examine the following issues:

• When does ownership transfer (change)?
• Who takes the risk associated with inventory storage?
• Who takes the risk associated with inventory obsolescence?
• Which tracking procedures are (will be) used?

Depending on the nature of a consignment arrangement, the following benefits and risks may arise for consignor and consignee, respectively:

4. Consignee’s accounting controls for consigned inventory

It is important for a consignee to properly monitor and audit the consigned inventory. Three major accounting controls for consigned merchandise include:

• Identification: consigned inventory should be prominently labeled with an identification tag (e.g., colored tag) when such inventory is received. Separate colored receiving reports may be used. In the computer system, consigned inventory should be recorded with a unique part number.
• Segregation:  consigned inventory should be physically segregated from other inventory. For example, a part of a warehouse can be set aside for consigned inventory.  Consigned merchandise should be stored in a safe place protected from various hazards such as fire, theft, etc.
• Monitoring: consigned inventory should be monitored by the materials review board in order to determine whether the consigned inventory is obsolete.

In addition to the above-listed accounting controls, consignee could use the following consigned inventory practices:

• Hire independent audit firm for periodic audits of inventory and consigned inventory controls and report the findings to the consignor.
• Allow the consignor to inspect consigned inventory.
• Set minimum and maximum levels for consigned merchandise.
• Establish a maximum amount of time consigned inventory can be retained before it becomes obsolete (should keep in mind shelf-life issues).

Finally, periodically the consignee must send an Account Sales Report to the consignor. The Accounts Sales Report shows the merchandise received, merchandise sold, expenses chargeable (i.e., reimbursable) to the consignment, and the cash remitted. Then, revenue can be recognized by the consignor.

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